Coming off a ‘mortgage holiday’? Ask your bank these questions

Hundreds of thousands of people are going to be hearing from their banks to see if they’re ready to resume making their mortgage repayments. 

A number of options will be raised depending on each person’s financial situation. Some of them may involve restructuring.

But there’s some questions to ask and matters to consider before making such a long term decision. Here’s a few.

1. Ask: “Can you cut my interest rate?”

Banks have said they’re prepared to help people struggling financially due to the extraordinary circumstances brought about by the COVID-19 pandemic. 

An impactful way for them to do this is by reducing the interest rate you’re being charged, Sally Tindall said, research director at RateCity. 

“As a customer in financial difficulty, you should be on their lowest available rate,” she said. “This alone could potentially save you thousands of dollars over the life of your loan.”

The recent fall in interest rates has resulted in even big banks offering cheaper mortgages than average. 

The average customer is on a rate of 3.22 per cent, according to RBA July figures, but there are ‘big four’ banks offering variable loans from 2.69 per cent and fixed loans of 2.19 per cent.

If this customer -- an owner occupier paying principal and interest with a remaining 25 year term -- was to switch their $500,000 balance to the 2.69 variable rate, they’d pay $137 less a month in repayments.

They’d save $2630 in interest in the first year. Over five years, they’d save $12,661.

2. Ask: Would restructuring save me more money than deferring?

Banks are offering some customers a few options that will likely lower their mortgage repayments so that they can be resumed, but these options could affect the amount that would need to be repaid over the life of the loan.

These options may include converting your mortgage to an interest-only loan, extending the loan term, or deferring mortgage repayments for a further four months.

Interest only loans generally charge a higher rate of interest

The repayments on an interest only loan is typically less than the principal and interest repayment, but these loans generally have higher interest rates.

“If you switch to interest-only repayments because that’s all you can afford to pay, make sure your bank doesn’t hike your rate,” Ms Tindall said.

“Customers shouldn’t be hit with a rate hike at a time when they can’t make ends meet.”

Repaying your loan over a longer term could cost more money

Another option is to stretch the repayment of a loan over a longer period of time, so that less money needs to be repaid each month.

Extending your loan term will reduce your monthly repayments but will cost significantly more in the long term, Ms Tindall said.

Deferring repayments does not stop interest charges

If you’ve deferred mortgage repayments for six months but still haven’t recovered financially, the banks and financial regulators have made it possible to extend the deferral for a further four months.

It’s a welcome relief option if you’ve lost your job or income, but taking it up is likely to leave you spending more money on your mortgage.

Deferring the repayments does not stop interest from being charged. Interest will keep being calculated on the growing balance of the loan, likely adding thousands of dollars over its term. 

Extra repayments can shave these costs down, but not everyone will be able to make them, Ms Tindall said.

“Customers coming off a deferral must decide whether they can afford to make higher repayments to catch up on their mortgage, or extend out their loan term and keep their repayments the same,” she said.

“While paying extra on your mortgage will help you get back on track, a lot of people just won’t be in a position to make extra repayments right now.

3. Ask: “Can you waive my fees?”

Fees can be enough to offset the benefits of a low interest rate on a mortgage, and this is one reason why banks present a comparison rate alongside the advertised rate -- because it factors in fees when it comes to the servicing cost of the loan.

Asking your bank to waive fees while you are in financial difficulty then could make meeting your mortgage repayments easier, while freeing up funds to help you meet the other commitments in your life.

4. Do: Get independent financial advice

Banks have gone on record claiming they’ll help customers recover their financial footing, but it’s worth getting independent financial advice too.

Financial advice can be obtained for free or at a very low cost, depending on your financial circumstances. Consider your situation and speak to a financial advisor or a mortgage broker. 

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